Kalikamba Vividhoddesha Sahakari Sangha Limited Vs ITO (ITAT Bangalore)
Excess Nominal Members Do Not Wipe Out the Entire Section 80P Deduction: Bengaluru ITAT Directs Profit-Wise Computation
Summary: Can a co-operative credit society be denied its entire deduction under section 80P(2)(a)(i) because the number of its nominal or associate members exceeds the limit under the Karnataka Co-Operative Societies Act? The Bengaluru ITAT has held that the deduction must be examined with reference to the profits attributable to eligible member transactions. The presence of transactions outside the permitted membership limit does not, by itself, justify denying relief on all the society’s business income.
How the Dispute Arose
The assessee, a co-operative credit society registered under the Karnataka Co-Operative Societies Act, 1959, provided credit facilities to its members. For AY 2017–18, it returned nil taxable income after claiming deduction under section 80P.
During scrutiny, the Assessing Officer found that the society had 1,774 regular members and 1,967 nominal members. Taking the view that the number of nominal members exceeded the permitted limit, he concluded that the society had accepted deposits and advanced loans to persons who could not be regarded as members for section 80P purposes. He relied on the Supreme Court decision in Citizen Co-operative Society Ltd. v. ACIT and disallowed the society’s claim of ₹15,48,289 under section 80P(2)(a)(i). The CIT(A) upheld the disallowance.
Before the Tribunal, the society argued that nominal members are included in the definition of “member” under section 2(f) of the Karnataka Act. It also contended that, even if some transactions fell beyond the permitted threshold, the authorities could not deny deduction on profits from credit facilities provided to regular members and eligible nominal or associate members.
Nominal Members Are Members Under the Karnataka Act
The Tribunal began with the wording of section 80P(2)(a)(i), which allows deduction of profits and gains attributable to the business of providing credit facilities to a co-operative society’s members. Since the Income-tax Act does not itself define “member” for this purpose, the society’s governing State law became relevant.
Under section 2(f) of the Karnataka Co-Operative Societies Act, the term “member” includes a nominal member. The Tribunal also noted that section 18 permits a society to admit nominal members. Their lack of voting rights did not, by itself, turn them into members of the general public.
For this reason, the Tribunal found the Assessing Officer’s reliance on Citizen Co-operative Society Ltd. misplaced. That decision concerned materially different facts, including lending to the general public and activities found to be contrary to the law under which that society was formed. The Tribunal instead applied the reasoning of the Supreme Court in Mavilayi Service Co-operative Bank Ltd. v. CIT, which recognised that the meaning of “member” must be understood in the context of the applicable State co-operative law.
The Tribunal therefore held that deposits from, and loans to, nominal members do not automatically disentitle the society from section 80P deduction.
Excess Membership Calls for Apportionment, Not Total Denial
The Tribunal also considered the restriction under section 18 of the Karnataka Act on the number of associate members. Its direction was to allow section 80P(2)(a)(i) deduction on business income attributable to credit facilities provided to regular members and nominal or associate members within the permitted limit. Profits attributable to credit facilities provided outside that eligible class were to be taxed after allowing permissible expenses.
This is the central finding of the order. Eligibility of the society for deduction and the quantum of profits attributable to eligible activity are separate questions. Even where some lending does not qualify, the profits from qualifying member transactions must still be identified and allowed deduction.
The society also referred to section 60(2) of the Karnataka Act, which permits a loan to a depositor against the security of the deposit. The Tribunal clarified that permission to make such a loan does not, on its own, bring the resulting profit within section 80P(2)(a)(i). For that deduction, the depositor must still qualify as a member under the governing Act.
Interest on Statutory Deposits and Cost of Funds
The society had also raised grounds concerning interest earned on investments. The Tribunal held that interest from deposits required to be maintained under the Karnataka co-operative law forms part of the society’s operational income and qualifies for deduction under section 80P(2)(a)(i). Since the authorities had not determined the amount required to be maintained, it sent this issue back to the Assessing Officer to verify the statutory requirement and allow deduction on the corresponding interest.
For any investment above the required statutory amount, the Tribunal gave an alternative direction. If the corresponding interest is assessed as income from other sources, the proportionate cost incurred to earn that income must be deducted while computing the taxable amount.
Disallowance of Deposit Interest Cannot Inflate Taxable Profit Alone
A further issue concerned a provision for interest payable on members’ deposits. The Tribunal noted that this provision related to the society’s credit business. If the provision was disallowed, the business profit would increase; the corresponding section 80P deduction must also increase to the extent that the enhanced profit is attributable to eligible member transactions. It directed the Assessing Officer to give effect to that consequence. The appeal was partly allowed.
Author’s Comments
The decision offers a practical answer to an all-or-nothing approach often taken in section 80P assessments. A society with excess nominal or associate members may face taxation on profits from transactions outside the eligible class, but that does not erase the deduction on profits attributable to eligible members. Proper member records and a supportable allocation of income and expenses will therefore matter.
The order’s treatment of deposit interest is equally significant. It distinguishes deposits maintained to meet a statutory requirement from investments beyond that requirement. The former may generate deductible operational income; for the latter, if the interest is taxed under “other sources”, the related cost cannot simply be ignored. The Tribunal’s directions require the Assessing Officer to determine the figures rather than tax gross interest without examining the underlying funds.
Cases Discussed
- Citizen Co-operative Society Ltd. vs. ACIT, [2017] 397 ITR 1 (SC)
- Mavilayi Service Co-operative Bank Ltd. vs. CIT, Calicut, [2021] 431 ITR 1 (SC)
- U.P. Cooperative Cane Unions’ Federation Ltd. v. CIT [1997] 11 SCC 287
FULL TEXT OF THE ORDER OF ITAT, BANGALORE BENCH
1. The assessee has filed the present appeal against the impugned order dated 20/12/2024, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2017-18.
2. In this appeal, the assessee has raised the following grounds: –
1. The order passed by the C.I.T. (A) is a non-speaking order in as much as, it failed to make point-wise rebuttal of the grounds raised by the appellant in the written submission dated 13-12-2024 which was noted in para 4.4 of the impugned order.
2. Both the below authorities erred in not granting deduction to such extent of the Business Profits (out of total Business Profits of Rs. 10,08,031/-) attributable to its transactions with Regular Members, Nominal Members and the permitted threshold of Associate Members (being 15% of Regular members) which fully qualifies for deduction u/s. 80P(2)(a)(i) of the Act and charging only the excess Business Profits arising from Associate Members for tax subject to deduction for admin expenses against the same.
3. The Respondent also erred in not verifying whether the excess number of Associate members over and above the threshold prescribed under sec. 18(1) of the KCS Act would fall under Sec. 60 of KCS Act to avail exemption u/s. 80P of the Act.
4. Both the below authorities erred in law in not granting deduction for the Interest on investments of Rs. 4,03,182/- derived by the appellant from Co-operative Societies w/s. 80P(2)(d) of the Act and wrongly considering and taxing the entire interest on investments of Rs. 5,40,258/- as derived from SCDCC Bank.
5. Whether or not the interest on investments derived by the appellant from SCDCC Bank Rs. 1,37,076/- from mandatory maintenance of fluid resources as required under its governing statute qualify for deduction u/s. 8P(2)(a)(i) of the Act.
6. Without prejudice, the appellant is entitled for full deduction u/s. 80P (2)(d) of the Act in respect of interest on investments of Rs. 1,37,076/- derived from SCDCC Bank as it is covered by the judgement of Hon. High Court of Kerala in ITA No. 142/2019 Principal Commissioner of Income tax, Thiruvananthapuram vs. Vilappil Service Co-op. Bank Ltd, Peyad.
7. Without prejudice, even if the interest income from SCDCC Bank is considered under Sec. 56 of the Act, then in such an event, this appellant is entitled to claim deduction for cost of funds used for investment in Term Deposits u/s. 57(iii) of the Act.
8. Whether or not the addition of Rs. 1,00,000/- sustained in appeal in respect of differential provision for Interest payable on Deposits is opposed to:
(a) CBDT Circular No. 37/2016 dated 02-11-2016 which gives the relief in respect of any disallowance of business expenditure by way of deduction under Chapter -VI A of the Act to the extent profits so enhanced by such disallowance, and
(b) the decision of Hon. Bombay High Court in C.I.T. vs. M/s. Gem Plus Jewellery India Ltd. and also the decision of this Tribunal in ITA No. 436/Bang/2023 in Shreerama Credit Co-op. Society Ltd. Kundapura vs. ACIT, Circle 1, Udupi.
9. Both the authorities below passed the impugned Orders contrary to established principles laid down by the Hon’ble Supreme Court and jurisdictional High Court.
3. The first issue that arises for our consideration, in the present appeal, pertains to the claim of deduction under section 80P(2)(a)(i) of the Act by the assessee.
4. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a co-operative credit society registered under the Karnataka Co-Operative Societies Act, 1959 and is engaged in carrying on the business of providing credit facilities to its members. For the year under consideration, the assessee filed its return of income on 03/10/2017, declaring the gross total income of ₹ 15,69,919 and return total income at Rs. Nil after claiming the entire income of ₹ 15,69,919 as deduction under section 80P of the Act. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, the assessee was asked to furnish a list of members, bifurcated into regular and nominal members. The assessee was also asked to furnish the bye-laws of the society. From the details filed by the assessee, it was observed that there were 1774 regular members and 1967 nominal members. Since, as per the provisions of the Karnataka Co-Operative Societies Act, 1959, nominal members should not be more than 15% of the regular members, the assessee was asked to show cause as to why the deduction claimed under section 80P(2)(a)(i) of the Act should not be denied, as the assessee has failed to satisfy the appropriate conditions. In response, the assessee submitted that it is engaged in the business of providing credit facilities to its members and is not engaged in any sort of banking business. Further, the assessee submitted that it is carrying on the business exclusively with its members. The assessee submitted that the definition of “member” under section 2(f) of the Karnataka Co-Operative Societies Act, 1959, also includes a nominal member. Thus, the assessee submitted that its activities are well within the framework of law.
5. The Assessing Officer (“AO”), vide order dated 04/12/2019 passed under section 143(3) of the Act, disagreed with the submissions of the assessee and held that the assessee cannot claim the benefit of section 80P of the Act as the present case is squarely covered by the decision of the Hon’ble Supreme Court in Citizen Co-operative Society Ltd vs. ACIT, [2017] 397 ITR 1 (SC). The AO held that, in the present case, the assessee also accepted deposits from nominal members and advanced loans to earn maximum returns. The AO further held that, since nominal members are more than 15% of the regular members, the assessee violated the provisions of the Karnataka Co-Operative Societies Act, 1959. The AO also held that the principle of mutuality is totally lost in the present case between regular members and nominal members. Further, it was held that the assessee cannot be treated as a co-operative society meant only for its members and providing credit facilities to its members. The AO held that since the assessee is receiving deposits and advancing loans to persons other than the shareholding members, although with the permission or the provision in its bye-laws, the same prevents it from claiming deduction under section 80P(2)(a)(i), which is meant only for a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members. Accordingly, the AO disallowed the deduction of ₹ 15,48,289 claimed under section 80P(2)(a)(i) of the Act.
6. The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee and upheld the disallowance made under section 80P(2)(a)(i) of the Act. Being aggrieved, the assessee is in appeal before us.
7. We have considered the submissions of both sides and perused the material available on record. In the present case, the assessee is a co-operative credit society registered under the Karnataka Co-Operative Societies Act, 1959. During the year under consideration, the assessee claimed deduction of ₹15,48,289 under section 80P(2)(a)(i) of the Act. As per the assessee, since it is in the business of providing credit facilities to its members, its income from the said business is allowable as a deduction under section 80P(2)(a)(i) of the Act. However, the AO rejected the claim of the assessee on the basis that the assessee is also accepting deposits and advancing loans to the nominal members, who cannot be called as members. Thus, it was held that the assessee cannot be said to be engaged in providing credit facilities to its members. In support of its conclusion, the AO relied upon the decision of the Hon’ble Supreme Court in Citizen Co-operative Society Ltd. (supra).
8. Before proceeding further, it is relevant to note the provisions of section 80P of the Act, under which the assessee has claimed the deduction in the present case. As per the provisions of section 80P(1) of the Act, the income referred to in sub-section (2) to section 80P shall be allowed as a deduction to an assessee being a co-operative society. The provisions of section 80P(2)(a)(i) of the Act, under which the deduction is claimed by the assessee, are reproduced as follows: –
“(2) The sums referred to in sub-section (1) shall be the following, namely:—
(a) in the case of a co-operative society engaged in—
(i) carrying on the business of banking or providing credit facilities to its members, or
………….
………….
the whole of the amount of profits and gains of business attributable to any one or more of such activities”
9. In the present case, the assessee is a co-operative credit society. The assessee has two types of members, namely, regular and nominal members. Regular members have the right to vote and are subscribers to the assessee’s shares. On the other hand, nominal members are admitted on payment of fees and don’t have voting rights. On the basis that the assessee has transacted with non-members, i.e. the persons who are nominal members, the Revenue authorities have denied the deduction claimed under section 80P(2)(a)(i) of the Act by the assessee. At this stage, it is pertinent to note that as per section 2(f) of the Karnataka Co-Operative Societies Act, 1959, the term “member” includes a nominal member. Therefore, we are of the considered view that nominal members are also members for the purpose of the Karnataka Co-Operative Societies Act, 1959.
10. From a careful perusal of the decision in Citizen Co-operative Society Ltd (supra), relied upon by the AO, we find that the Hon’ble Supreme Court held that Citizen Co-operative Society Ltd is not entitled to claim the deduction under section 80P(2)(a)(i) of the Act as the society has granted loans to the general public, and the society has catered to ordinary members as well as its nominal members, without any approval from the Registrar of the Societies. Thus, the activities of the society were found to be in violation of the provisions of the Mutually Aided Co-operative Societies Act, 1995, under which it was formed.
11. However, as per section 18 of the Karnataka Co-Operative Societies Act, 1959, the co-operative society can admit, inter alia, any individual as a nominal member. Thus, the Karnataka Co-Operative Societies Act, 1959, under which the assessee is formed, does not bar admission of a nominal member in the co-operative society. Further, unlike the facts in Citizen Co-operative Society Ltd (supra), section 60 of the Karnataka Co-Operative Societies Act, 1959 restricts loans only to persons other than members. Thus, the Karnataka Co-Operative Societies Act, 1959 expressly permits loans to members and, as noted above, the term “member” also includes a nominal member.
12. We find that in a subsequent decision in Mavilayi Service Co-operative Bank Ltd. vs. CIT, Calicut, reported in [2021] 431 ITR 1 (SC), the Hon’ble Supreme Court, after considering the definition of the term “members” in Kerala Co-operative Societies Act, 1969 held that unlike the Andhra Pradesh Act, which was considered in the case of Citizen Co-operative Society Ltd (supra), “nominal members” are members as defined under the Kerala Act, and therefore, the loans given to such nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i) of the Act. The relevant findings of the Hon’ble Supreme Court, in the aforesaid decision, are reproduced as follows: –
“46. It must also be mentioned here that unlike the Andhra Act that Citizen Cooperative Society Ltd. (supra) considered, ‘nominal members’ are ‘members’ as defined under the Kerala Act. This Court in U.P. Cooperative Cane Unions’ Federation Ltd. v. CIT [1997] 11 SCC 287 referred to section 80P of the IT Act and then held:
“8. The expression “members” is not defined in the Act. Since a cooperative society has to be established under the provisions of the law made by the State Legislature in that regard, the expression “members” in Section 80-P(2)(a)(i) must, therefore, be construed in the context of the provisions of the law enacted by the State Legislature under which the cooperative society claiming exemption has been formed. It is, therefore, necessary to construe the expression “members” in Section 80-P(2)(a)(i) of the Act in the light of the definition of that expression as contained in Section 2(n) of the Cooperative Societies Act. The said provision reads as under:
“2. (n) ‘Member’ means a person who joined in the application for registration of a society or a person admitted to membership after such registration in accordance with the provisions of this Act, the rules and the bye-laws for the time being in force but a reference to ‘members’ anywhere in this Act in connection with the possession or exercise of any right or power or the existence or discharge of any liability or duty shall not include reference to any class of members who by reason of the provisions of this Act do not possess such right or power or have no such liability or duty;””
Considering the definition of ‘member’ under the Kerala Act, loans given to such nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i).”
13. Therefore, we are of the considered view that the reliance placed by the Revenue authorities on the decision of the Hon’ble Supreme Court in Citizen Co-operative Society Ltd. (supra) is completely misplaced, as the said decision was rendered on its own facts, which are different from the present case. On the other hand, we find that the facts of the present case are closer to those in Mavilayi Service Co-operative Bank Ltd. (supra), as under both the Kerala Co-operative Societies Act, 1969 and the Karnataka Co-Operative Societies Act, 1959, “members” are defined to include nominal members. Therefore, we are of the considered view that merely because the assessee was receiving deposits and advances loans to the nominal members, the same does not disentitle the assessee from claiming the deduction under section 80P(2)(a)(i) of the Act.
14. From the perusal of the provisions of section 18 of the Karnataka Co-Operative Societies Act, 1959, we find that the proviso to said section imposes a restriction on the number of nominal members in the co-operative society. The said proviso to section 18 of the Karnataka Co-Operative Societies Act, 1959, reads as follows: –
“Provided that the number of associate members under clause (a) in any Co-operative Society shall not exceed fifteen percent of the total membership of the society. However, in case of Co-operative Societies already having more than fifteen percent of their total membership as associate members, the excess associate members shall be either made as member, if eligible under the section 16 or shall be removed from the associate membership within six months from the date of commencement of the Karnataka Co-operative Societies (Amendment) Act, 2014.”
15. Since in the present case, the assessee has 1774 regular members and 1967 nominal members, the AO held that the assessee has violated the provisions of the Karnataka Co-Operative Societies Act, 1959. At this stage, it is pertinent to note that the following observations of the Hon’ble Supreme Court in Mavilayi Service Co-operative Bank Ltd. (supra), rendered in the context of deduction under section 80P of the Act: –
“33. ……Once it is clear that the co-operative society in question is providing credit facilities to its members, the fact that it is providing credit facilities to non-members does not disentitle the society in question from availing of the deduction. The distinction between eligibility for deduction and attributability of amount of profits and gains to an activity is a real one. Since profits and gains from credit facilities given to non-members cannot be said to be attributable to the activity of providing credit facilities to its members, such amount cannot be deducted.”
16. Therefore, respectfully following the decision of the Hon’ble Supreme Court in Mavilayi Service Co-operative Bank Ltd. (supra), we direct the AO to grant the deduction under section 80P(2)(a)(i) of the Act to such extent of business income which is attributable to providing credit facilities to the regular members and nominal/associate members (being not exceeding 15% of the regular members). The balance profits and gains from providing credit facilities to the non-members are directed to be subjected to tax after allowing permissible expenses, as per law.
17. As regards the contention of the assessee that the AO has not taken into consideration the provisions of section 60(2) of the Karnataka Co-Operative Societies Act, 1959, which starts with a non-obstante clause, and allows the co-operative society to make a loan to a depositor on the security of his deposit, we are of the considered view that even if advancing of loan on the security of the deposit is permitted, the profits and gains from such a transaction can only come under the purview of section 80P(2)(a)(i) of the Act, if the depositor is a member within the meaning of the Karnataka Co-Operative Societies Act, 1959.
18. Therefore, with the above directions, the grounds pertaining to the claim of deduction under section 80P(2)(a)(i) of the Act are partly allowed.
19. As regards the interest income earned by the assessee from statutory deposits, we are of the considered view that the same should be considered as operational income derived in the course of the assessee’s business and consequently the same qualifies for deduction under section 80P(2)(a)(i) of the Act. As the details of the quantum of amount necessary to be deposited to comply with the Karnataka Co-Operative Societies Act, 1959, have not been looked into by the Revenue authorities, we, in the interest of justice and fair play, restore this issue to the file of the AO with direction to compute the required quantum of amount which needs to be deposited as per statutory requirement and allow the claim of the deduction under section 80P(2)(a)(i) of the Act of the corresponding interest income.
20. Furthermore, without prejudice to the above finding, we are also inclined to consider the alternative plea raised by the assessee. In the event that the AO found that any amount of investment is over and above the required statutory limit, and the corresponding interest income from such deposits is taxable as “Income from Other Sources,” then we are of the considered view that the corresponding cost incurred in earning such income must be deducted while computing taxable income. It is a well-established principle of taxation that only net income should be brought to tax, and any expenditure directly attributable to the earning of such income should be allowed as a deduction. Therefore, we direct the AO to grant a proportionate deduction of the corresponding cost, in the eventuality of assessing the interest income under the head “Income from Other Sources”.
21. As regards the disallowance of provision for interest payable on deposits, during the assessment proceedings, the assessee submitted that as per Rule 22 of the Karnataka State Co-Operative Societies Rules, it has to show the outstanding interest on members’ deposits, but at the same time the unrealised interest on loans is not accounted for. However, the submissions of the assessee were rejected on the basis that the assessee has not accounted for interest receipts on an accrual basis, and thus, the provision for interest payable debited by the assessee was brought to tax. In the grounds raised in the present appeal, the assessee has claimed that the disallowance of provision for interest payable on deposits be allowed as a deduction under Chapter VI-A of the Act.
22. Having considered the submissions and perused the material available on record, in the present case, it is undisputed that provision for interest payable on members’ deposits is related to the business activity of the assessee against which deduction under section 80P(2)(a)(i) of the Act is claimed. Thus, we find merit in the assessee’s claim, as any disallowance of the provision for interest payable on members’ deposits would increase the assessee’s profit from the business of providing credit facilities to its members. Resultantly, the claim of the assessee under section 80P(2)(a)(i) of the Act would ultimately increase. Accordingly, we direct the AO to enhance the benefit of deduction under section 80P(2)(a)(i) of the Act. Thus, the ground qua this issue is allowed.
23. In the result, the appeal by the assessee is partly allowed.
Order pronounced in the open court on 16-Sept-2026.
